Malcolm Turnbull's 'Once In A Generation' Income Tax Changes Would Give Power To The States

Malcolm Turnbull has promised that his "once in several generations reform" on tax won't much affect the average taxpayer.

The PM on Wednesday announced he would use Friday's Council of Australian Governments Meeting to encourage state premiers to sign up to his plan, whereby the states would take over the federal government's responsibility for collecting income tax.

Currently, the federal government collects the tax and distributes it to the states to pay for roads, hospitals, schools and other state expenses. Turnbull says he wants to remove the middle man.

"As we know, every year and often several times a year, [the states] go cap in hand in Canberra, to Canberra and complain that the Federal Government is not giving them enough money," he told reporters at a press conference in Sydney's west on Wednesday.

Turnbull called this process "a failure at the heart of the Federation".

"What we are proposing to the states is that we should work together on this basis: that we, the Federal Government, will reduce our income tax by an agreed percentage and allow state governments to levy an income tax equal to that amount that we have withdrawn from," he said.

"You could say it’s a once in a generation reform, in fact it’s several generations since it was last attempted."

Moving income taxation powers back to the states, from the federal government, has a set of issues; if you live near a state border and commute to work on the other side of the border, which state do you pay tax to? No doubt those issues will be debated and argued over at COAG on Friday, but Turnbull was quick to clarify his own comments in a video released on Wednesday afternoon.

Australia’s governments must work together to solve the big issues. Our economic plan is designed to ensure that as our economy transitions from the mining boom to the new economy, we continue to deliver the vital services and infrastructure Australians expect.The focus of governments should be about delivering better services – not arguing over funding.We are all sick of it. A way to solve these arguments would be to give states a proportion of personal income tax - rather than demanding money from Canberra they would be raising money themselves and be accountable to their own voters.

"The focus of governments should be about delivering better services -- not arguing over funding. The key principles will be that this is not about increasing the total tax take -- any income tax surrendered by the Commonwealth to the States would be offset by a reduction in Commonwealth grants to the states," the PM said.

"Taxpayers would not notice any administrative change -- the Australian Tax Office would continue to manage the collection of income tax. So, clearer lines of responsibility, less duplication, more open accountability."

The claim is that taxpayers would not notice much difference; theoretically, taxes would remain the same, and citizens would pay their taxes in the same way they currently do. However, questions have been raised about how tax rates would differ between states, and whether smaller states with fewer taxpayers would be worse off under the proposed system.

"This is of course a very important part of the design to ensure that there is no disadvantage to the smaller states and of course there are mechanisms within the federal finance arrangements to do that. But we can manage that and I’ve talked to the Premiers of South Australia and Tasmania about this directly," Turnbull said.

"So far we’ve had very positive feedback but this is a beginning of a journey."

The question now is, whether Turnbull can convince state leaders to agree to his plan.

Another interesting sidenote to the debate, is the input of Treasurer Scott Morrison. While the PM was in western Sydney announcing the tax shake-up, Morrison was giving a dry but important press conference to announce the Australian Stock Exchange would lose its monopoly on share clearing. The only thing the gathered journalists wanted to talk about, however, were leaked plans -- reported in media on Tuesday evening -- for the federal government to give up its power over income tax and grant that power to the states. Morrison was not biting, giving no indication that the proposal was being seriously considered.

When asked "is it fair to say you are considering State raised income taxes as a serious consideration?" Morrison dodged the question, saying "It is fair to say we're meeting with the States and Territories on Friday. That's what it's fair to say and we will continue to sit down and work through how we fix these big problems."

When another journalist asked "You are giving power to the States. Is that what you want to do?" Morrison answered "That is quite a leap from what I just said."

What a difference an hour makes, as Turnbull fronted up for a press conference in Penrith -- less than an hour away from Morrison's announcement in the Sydney CBD -- and proudly told media that the plan was firmly on the table and that he would be pushing for state premiers to get on board.

A mere hour had passed since Morrison continually and emphatically rejected journalists' questions about the plan, and there was the PM, loud and proud in telling media that the plan was already well in motion.

Once more, Morrison was made to look left out. Just as he had been last Monday, when he gave a radio interview continually hosing down speculation that the federal budget would be moved forward a week to May 3.

Just an hour later, Turnbull had flipped the political table upside down, announcing an early budget for May 3. Morrison was left red-faced, looking as though he didn't know or wasn't told when he would have to hand down the budget, the most important political night of his life thus far. Labor seized on the mix-up, saying the PM had ""completely emasculated" Morrison and that the treasurer "has no influence over tax policy or even the timing of his own budget".

The deeper issue here is the divide seemingly widening between the Prime Minister and his Treasurer. With an election campaign looming, expect more column inches to be devoted to the relationship between Turnbull and Morrison. The PM and Treasurer have 34 days until they deliver the federal budget, a document and vision that will likely make or break their re-election chances; but on recent form, it seems they are having difficulty getting on the same page.